Why the key is SaaSification and not Subscription. Nike, Starbucks, Microsoft and Adobe

SaaSification of Industries · Luigi Mallardo · September 30, 2020

Key points of this post:

  • Everyone wants to do subscriptions now and no doubt it’s going to be one of the dominant models in the next 5-10 years.
  • Paid subscriptions may not suit your business though. It’s not for everyone.
  • With or without subscriptions, any business needs to build a certain “reprogramming” of the business and go-to-market playbook around 7 key Mantras of SaaSification.
  • Behind the Like button of Facebook there must have been such a high intensity of thoughts, expertise, coding, A/B testing, decisions, etc. Behind Subscriptions there must be SaaSification to make it work.
  • Saasification is not about technology. It’s about the change of the way of thinking and acting of the management, in any business.

 

Everyone is talking about subscriptions 

The pandemic has shown how the transactional model of getting a product to market and selling as many units as possible is fragile.

The future will reward companies that are able to build resilience to shocks and the way forward is finding opportunities to build recurring revenue and understand how the real work starts after the sale.

Subscriptions seem to have become the Holy grail.

In some cases, like the launch of Apple One in September 2020, it was an organic evolution. Apple service revenue was more than $ 30 billion in 2017. A Fortune 100 company itself already.

In other cases, like the subscription model launched by the international sandwich shop franchise chain Pret A Manger in UK, it seems like a desperate attempt to fight for survival.

Launching subscriptions has become cool as well. Swiss brand On Running has launched this month the eco-friendly Cyclon sneaker subscription. Welcome to the era of Shoe-scription.

Too much focus on subscriptions can be misleading though.

In the New Normal it should be clear to everyone that Go-To-Market Playbooks and Business Models need to be reinvented in all industries.

Paid subscriptions are not for everyone though. 

 

Let’s take for example 4 well-known and successful companies: Adobe, Microsoft, Starbucks and Nike.

Two tech companies, the most iconic lifestyle brand in the world and the biggest chain of coffeehouses.

Is it a coincidence that the 4 companies have a similar evolution of stock valuation in the last few years?

Adobe.

In a few years years Adobe Creative Cloud went from almost no subscription revenue to a virtually 100% subscription model. When Adobe announced the transition its stock was trading at less than 30$. Today Adobe stock is trading at 480 $. The vast majority of its revenue is recurring.

Microsoft.

A public company since 1986, Microsoft grew so much especially since 2017-2018 because it decided to become a SaaS (Software as a Service) company with its “Commercial Cloud” business. Few days ago the company announced the acquisition of ZeniMax Media for $7.5 billion. Gamers’ long-awaited fantasy about a “Netflix for gaming” took a step closer to reality. “We are really seeing a pivot in the gaming industry from a device-centric industry to a player-centric industry,” said Phil Spencer, Microsoft’s executive vice president of gaming, in an interview.

Nike.

Growth over 70% since early 2019… A tech stock? No, it’s Nike which has transitioned from a conventional consumer brand, selling most of its merchandise wholesale to major retailers and operating a few of its own stores, to becoming a brand that’s built around memberships and digital technology, including the acquisition of SaaS businesses through M&A and a high focus on Artificial Intelligence and data science. Nike is getting obsessed with the customer journey.

Last year Nike hired the new President and CEO, John J. Donahoe II, from a SaaS company. If you read the transcript of last earning call, you can realise how Nike is starting to talk like a SaaS business:

  • “product innovation roadmap”
  • “app ecosystem”
  • “creation of a consistent end-to-end technology platform”
  • “vision for the marketplace, a digitally connected experience, where membership is a true differentiator”

Starbucks.

Starbucks has been a non-tech pioneer in learning from Google, Apple, Amazon and the rest of the SaaS industry. What did it learn? First of all, as pointed out in “Subscribed” by Tien Tzuo,  it’s the ID. They all have Dashboards that let them see what their customers are doing, so they can make smarter decisions around where to allocate resources and which new services to spin up – in Starbucks case, maybe it’s how many drink rewards “stars” to give out, or where to open a new store.

The Gmail team has the dashboard, Netflix has it, …, Nike and Starbucks are doing the same. Who’s the next: Coke, L’Oréal, Nestlé?

The common thread between the 4 companies is SaaSification. 

They SaaSed it up following 7 Mantras. 

Nike, Starbucks, Adobe and Microsoft have understood how the secret formula today is to follow a set of go-to-market mantras pioneered by the SaaS industry in the last 20+ years.

Companies taking over the world in some of the biggest industries are SaaS companies: Netflix, Linkedin, Uber, Spotify and Amazon, just to name a few. Not all of them run subscriptions with a regular fee like Netflix or Spotify though.

Following the Mantras of Saasification doesn’t mean necessarily moving 100% of a business into paid subscription, or even launching subscriptions at all, although the subscription model is often a big opportunity to consider, like it was for Adobe, Microsoft or for Dollar Shave Club, acquired by Unilever for 1 billion $ and taking the lead in transforming the shaving business into a subscription model.

SaaSification is For Everyone.

 

 

1. AGE OF CUSTOMER

You do not sell a Product, You sell an Experience.

The winners today understand that the competition is not on product and marketing.

“SaaSed-up” Companies start with the Customer.

Customers today expect the Spotify and Netflix experience in all aspects of their life, personally and professionally. They expect that any desired information or service is available, on any appropriate device, in context, at their moment of need.

In the new reality successful businesses like Nike or Starbucks are asking themselves different questions compared to the past: What do we need to do to build a relationship? What do we need to do to focus on outcomes? To grow our recurring revenue, and to deliver ongoing value? What does digital transformation mean for us?

In such a perspective Nike for example has improved customer engagement with tactics like workout programs on the Nike Training Club and Nike Running Club, and NikePlus member-focused stores like the Nike Live store in Los Angeles and a new one in Guangzhou.

With consumers around the world forced to adjust their daily routines because of the pandemic, including the way they work, shop, and exercise, those relationship-building efforts have paid off: almost 200% growth in demand for the Nike commerce app, with triple-digit growth in monthly active users. This is significant for the brand as it speaks to the increasing consumer adoption of their apps.

As far as Starbucks is concerned, at the end of 2019 there were 17 million people enrolled in Starbucks’ reward program in US and 10 million in China, which now represent a significant part of the company sales. The company has been pushing transactions on its mobile App which tells you when your order will be ready and how long will it take you to arrive at the closest store. It all started with that ID.

Competing on experience is the new frontier of competition.

 

2. ACCESSIBILITY

The future is selling access to things. You must focus on the service-level agreement that sits behind the product.

People want the comfort in their homes, not the furniture.

They want the ride, not the car.

The availability of fresh cold food, not the refrigerator.

A well functioning and ergonomic home office, not a chair, a desk, a laptop, a printer and so on.

Today business prosperity depends on the ability to create digitally enhanced products, services and experiences.

 

3. BE CONVERSATIONAL

As people are empowered, your company must have an authentic conversation and a bigger reason to exist.

A strong foundational WHY.

Lots of companies are missing it. A bigger reason to exist. They just talk about their WHAT, selling features and assets.

If you have a look at the home pages of Media Markt and Fnac, how do they start?

 

Do they seem to have a foundational WHY (and a WHY NOW)? That’s the story you should really be starting with.

You should be able to tell your story in a tweet.

4. SAAS UP YOUR VALUE BASED PRICING

Pricing for a product is pretty straightforward.

Your production expenses and desired margins define your Price.

Of course you have costs that you need to account for, but winners do not price an object, they price an outcome.

Everything is becoming bundled today. This is the model of the future – the Box, that can include physical and digital products/experiences.

Companies should think creatively about their pricing strategy in the new reality.

Customer segmentation has become critical.

Pricing and packaging is one of the most powerful growth level you have and YES –  Subscription is going to become one of the dominant business models although it’s not for everyone.

You do not need paid subscriptions to SaaS up.

However if you do subscriptions you need to SaaS up if you want the subscription to work well for your business.

 

5. BE OMNICHANNEL

SaaSed-up companies recognize that customers spend their time across many channels, and wherever those customers are, that’s where they should be meeting their customers’ needs.

The company that pioneered online shopping becomes a player with hundreds of physical stores. Why did Amazon buy Whole Foods for $13.4 Billion? Why did Alibaba invest $2.9 Billion in Sun Art Retail Group Limited?

The winning formats today are a mix of content and digital merged with the physical world.

Everything is Omnichannel. The era of the online vs offline silos is over.

Starbucks accelerates its omnichannel transformation. The company was already in the process of transforming the store experience since 2018 as 80 percent of transactions in U.S. company-operated stores were for “on-the-go” orders. And now that the coronavirus has essentially changed the world, Starbucks is wasting no time executing its strategy – in fact, accelerating previous plans. The Board of Starbucks announced in June 2020 the start of a “transformational phase” that will introduce a new store format known as “Starbucks Pickup.” After powering the ID/App usage for the last few years, it’s going a step forward. Closing 400 stores and kicking off the pick-up service.

Companies are taking advantage of online data to inform the design and presentation of their physical stores.

Winning companies are treating retail stores  as an extension of their online stores, as it is becoming obvious that it’s very difficult to be profitable through online sales alone. Or vice versa.

 

6. CHANGE THE KPI

As said Pret A Manger is launching a subscription in UK. It will offer customers up to five barista drinks a day through its new subscription service which costs £20 a month. I would be curious to understand if this launch has meant also the launch of a new internal KPI and reporting system. If the pilot will work, at some point Pret A Manger will need to change the KPIs and the way the business will report its performance.

The winning companies of the future will move from net sales and COGS to new KPI’s like MRR, churn, LTV and CAC. They are the metrics of the future economy.

LTV (Life Time Value) for example is one of the key metrics mentioned by the CEO of Nike during the last earnings call.

“You are not so much selling a product as you are creating annuities with a lifetime value that far exceed whatever you paid to acquire them”. Ben Thompson of Stratechery.

 

7. NEW GO-TO-MARKET FUNDAMENTALS

Customer Retention is the New Acquisition. The real work starts after the sales. 

The business model focused on selling more units, increasing the price and decreasing the cost is just over.

The business models of the new reality focus on acquiring more customers, increasing the value of those customers and holding on to those customers longer.

There are huge implication of this reality on different levels:

  • Leads become increasingly irrelevant. Marketing teams need to focus on revenue metrics, not vanity metrics.
  • Churn reduction becomes a top metric and business obsession.
  • New layers of organization are needed to make sure you acquire more customers in the new reality and that future growth will be more dependent on holding on to your existing customers longer. Have you ever heard what is Customer Success for a SaaS business?
  • You need to review your tech stack and there is a lot you can learn from SaaS on how to move to the next level.

 

CONCLUSIONS

As a Consumer or B2B business the survival and prosperity in the next decade cannot happen without a profound and urgent transformation of business and go-to-market models and postures.

This means moving from a product/feature and marketing focus to becoming a business built around memberships and the merge between digital technologies and the physical world.

Players like Nike, Starbucks and Unilever betting on Dollar Shave Club seem to have already got it right. They are SaaSing it up at full speed and just scratching the surface of what’s possible.

The key here is finally in Donahoe’s words at the Nike’s earning call this month. “Nike’s digital transformation strategy is not easily replicated,” showing he sees it as a competitive advantage. Nike was already the largest sportswear company in the world with a legacy of great products. Add an expanding membership program and a strong digital technology platform, and it’s not surprising that the stock is flourishing even in the midst of the pandemic.

Because of COVID-19 the majority of businesses are now so late to SaaS up and the risk of burning out is high for many of them.

Why have companies like Metro, Media Markt, Fnac or Primark performed poorly in the last few years?

In 2010, Metro AG was the fourth-largest retailer in the world measured by revenues, after Walmart, Carrefour and Tesco.

Ceconomy, like Fnac, is a consumer electronic retailer which operates through the European chains Media Markt and Saturn.

Associated British Food is the owner of Primark, a well known fast fashion retailer in Europe.

 

What relationship-building efforts have they done all these years?

What do they know about their individual customers?

What are they doing to build authentic and relevant engagement with their customer?

How long can they go ahead just focusing on product, price and every-day promotions?

What would you do if you were in the shoes of the Board of these companies?

 

If you enjoyed this post, you will also like this 7 minute podcast we recorded at Sales Hacker a few weeks before the pandemic exploded. It seemed a bit futuristic at that time but now …

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